House fraud decision rocks industry

Bank 'did not take steps to scrutinize power of attorney,'
judge rules

It took the better part of 18 months and more than $30,000 in legal fees, but
Paul Reviczky has his property back in his own name, with the $337,500 mortgage
in favour of HSBC Bank Canada finally discharged.

As reported last month in the Star, the Ontario Superior Court of
Justice ruled Reviczky is not responsible for the mortgage that was taken out on
his property after it was sold in 2006 without his knowledge. But Justice John
Macdonald's decision has ramifications that extend far beyond the parties
involved in the Reviczky litigation, and may well affect many future real estate
and mortgage transactions.

In the summer of 2006, Reviczky's rental property on Sheppard Ave. W. was
stolen from him. A fraudster used a forged power of attorney in favour of
Reviczky's non-existent grandson to sell the house to an innocent third party
for $450,000.

In June 2007, after months of legal proceedings at his own expense, Reviczky
finally obtained a court order restoring ownership to him, but not discharging
the purchaser's mortgage in favour of HSBC. Since both the purchaser and HSBC
were unaware of the fraud, the court in June declined to discharge the HSBC
mortgage, believing it to be valid.

Reviczky then faced the prospect of losing the house again, this time to the
bank. At this point, Reviczky became involved in a messy contest among three
insurers: Stewart Title, which insured and paid out the HSBC mortgage; LawPRO,
the Law Society's insurer representing the lawyer who acted for the fraudster
using the forged power of attorney; and the provincial Land Titles Assurance
Fund, which protects the public from fraud in the land titles system.

Stewart Title paid out the HSBC mortgage, but under the Consumer Protection
and Service Modernization Act, it was unable to recover its loss from the
government assurance fund.

If the mortgage was determined by a court to have been valid, Reviczky would
have had to pay off the HSBC loan by making a claim against the assurance fund.
Stewart Title would be off the hook to the bank and would recover its payout
from the public purse by way of Reviczky's claim. In that case, the title
insurer would have found a loophole in the law.

In his ruling last month, Judge Macdonald voided the bank's mortgage because
it "did not take steps to scrutinize the power of attorney." The bank "chose to
put itself in proximity to the unknown fraudster in this transaction by dealing
with him, yet it failed to make use of the opportunity to avoid the fraud, which
that proximity gave it."

The judge said the lawyer representing the fraudulent seller sent a copy of
the forged power of attorney to the lawyer acting for both the purchaser and the
bank. Both lawyers were unaware the document was a fake. At this point, the
second lawyer failed to "inform himself about the terms, conditions or validity
of the power of attorney." Since HSBC, through its lawyer, had an opportunity to
avoid the fraud and did not do so, the court decided it could not succeed in its
claim that the mortgage was valid.

"The bank knew ... ," the judge wrote, "the person purporting to sell the
property was acting pursuant to a power of attorney. The bank had the means of
protecting its interests in this circumstance ... (T)he bank must have known
(its) solicitor would be in direct dealings with the person purporting to sell,
whether through that person's solicitor or otherwise."

Ultimately, the judge decided the issue was not the actions or inaction of a
solicitor, but whether the bank had an opportunity to avoid the fraud. Effective
immediately, the Reviczky decision will have an enormous impact on how banks,
real estate agents, lawyers, buyers and sellers treat any transaction involving
a power of attorney.

In every transaction, those documents are now going to be scrutinized, not
only by the lawyer for the seller using the document, but by the lawyer for the
buyer and the buyer's bank. If a seller cannot provide satisfactory evidence
that the power of attorney is valid and enforceable, a buyer and his or her bank
could conceivably refuse to close the transaction.

Just exactly how this will happen especially where the giver of the power
of attorney is at the time mentally or physically incompetent, or overseas, or
simply unavailable remains to be seen.

The vast majority of powers of attorney used in real estate transactions are
legitimate documents, but from now on it will be tougher to use them to buy,
sell or mortgage real estate in Ontario.

[1]
Paul Reviczky owns
residential property on which HSBC Bank Canada has a charge. Both Mr.
Reviczky and the bank are victims of fraud. A fraudster acting pursuant
to a fictitious Power of Attorney and posing as Mr. Revickzy's relative
purported to sell the property to Pegman Meleknia, another victim of the
fraud. Mr. Meleknia borrowed most of the purchase money from the bank, on
the security of the aforesaid charge. The issue is the validity of the
charge on Mr. Reviczky's property, which is the subject to the Land
Titles Act
R.S.O. 1990 c. L-5 as amended.

INTRODUCTION

[2]
In Lawrence v.
Maple Trust Co. et al (2007), 84 O.R. (3d) 54, Gillese J.A. for a five
judge panel of the Court of Appeal held that the theory of deferred
indefeasibility of title accords with the Land Titles Act and must
be taken into account in analyzing its provisions. In her conclusion at
para. [67], Gillese J.A. summarized the effect of this theory as follows:

"Under this
theory, the party acquiring an interest in land from the party responsible
for the fraud (the "intermediate owner") is vulnerable to a claim from the
true owner because the intermediate owner had the opportunity to avoid the
fraud. However, any subsequent purchaser or encumbrancer (the "deferred
owner") has no such opportunity. Therefore the deferred owner acquires an
interest in the property that is good as against all the world".

[3]
The theory of
deferred indefeasibility is thus a rationale for allocating loss amongst
victims of fraud who are competing holders of interests in property
pursuant to the Land Titles Act.

THE POSITIONS OF THE PARTIES

[4]
The bank submits
that it innocently took its charge from Mr. Meleknia after he took title
to the property from the fraudster. The bank submits that Mr. Meleknia
was an intermediate owner and it is therefore a deferred owner. The bank
submits that its charge is therefore indefeasible, even against the true
owner, Mr. Reviczky.

[5]
The intervener ,
Mr. Sheldon Caplan, is the solicitor who acted for the fraudster. There
was no suggestion during argument that Mr. Caplan knew that his client was
a fraudster. Mr. Tighe submitted on Mr. Caplan's behalf that:

i.
Pursuant to Lawrence [supra], the bank is properly regarded
as an intermediate owner whose charge is defeasible in favour of
the true owner, Mr. Reviczky. The bank is an intermediate owner
because it dealt directly with the party responsible for the fraud.
It retained the same solicitor as Mr. Meleknia and its
solicitor dealt directly with Mr. Caplan, who acted for the fraudster.
The bank and Mr. Meleknia both therefore had the opportunity to avoid the
fraud;

ii.The
bank is also an intermediate owner because its charge is a purchase money
charge. Mr. Melknia's title to the property and the bank's charge on the
property were, in reality, created simultaneously as part of one
transaction, pursuant to Home Trust Co. v. Zivic, (2006) 277 D.L.R.
(4th) 349 (Ont. S.C.J.).

iii.
Alternatively, the theory of deferred indefeasibility of title is
inapplicable to a purchase money charge, pursuant to Home Trust
Co., [supra].

[6]
Mr. Caplan did not
deliver an affidavit. He provided at least some of his file contents to
Mr. Reviczky's counsel and they are exhibits in Mr. Reviczky's affidavit.
The Power of Attorney is in evidence by this means, as is Mr. Caplan's
written admission to Mr. Reviczky's counsel that he acted in the sale
transaction pursuant to the Power of Attorney. Mr. Tighe did not make
submissions about the form and content of the Power of Attorney or about
the instrument which Mr. Caplan registered in the general register in
respect of the Power of Attorney shortly before the closing.

[7]
Mr. Meleknia has
already conceded that his interest in the property was defeasible. The
transfer in his favour has been struck from the parcel register pursuant
to a consent order.

[8]
The solicitor who
acted for Mr. Meleknia and the bank is not a party. He filed an
affidavit. Since he is simply an unrepresented witness in this
application, none of my findings should be taken as affecting his legal
interests. I will refer to him as "the solicitor".

[9]
Mr. Reviczky
adopted the position taken on Mr. Caplan's behalf. From Mr. Reviczky's
perspective as the true owner and as the innocent victim of fraud, the
distinction between the voided transfer in favour of Mr. Meleknia and the
charge securing the borrowed money with which Mr. Meleknia purchased his
voided title is an illusory and illogical distinction. However, as
Epstein J. (as she then was) noted in Durrani v. Augierreflex,
(2000), 50 O.R. (3d) 353 at paras. [78] and [79] , there may be those who
will be deprived of legitimate interests in land because of the way the
Land Titles Act operates. They are entitled to make a claim against
the Land Titles Assurance Fund. A claim against the Fund would be
small satisfaction for Mr. Reviczky, who wants clear title to his
long-held property.

THE LEGAL ISSUES

[10]
Broadly stated, the
issue is whether the bank's charge is defeasible or indefeasible, pursuant
to the Land Titles Act. A narrower focus discloses the following
issues:

i.Since
the decision in Lawrence [supra], is it correct that the
theory of deferred indefeasibility of title does not apply to a charge
registered pursuant to the Land Titles Act which secures purchase
money, as was held in Home Trust Co. [supra]?

ii.If the
theory of deferred indefeasibility applies to such a charge, what are the
criteria for determining whether the chargee's interest is defeasible
or indefeasible?

iii.In
Lawrence[supra], the chargee was an intermediate owner.
There was no deferred owner, as Gillese J.A. noted in para. [22] of her
reasons. Are the conclusions and comments in Lawrence [supra]
about deferred owners therefore obiter dicta?

THE FACTS

[11]
In 1980, Mr. Reviczky
and his wife purchased as joint tenants the residential property
municipally known as 220 Sheppard Avenue West, Toronto, Ontario. Mrs.
Reviczky died in 2005 and Mr. Reviczky was registered in the parcel
register as the sole owner. The Reviczky's generally rented out the
property.

[12]
In March 2006, when
Mr. Reviczky was 88 years old, he rented the property to a couple who paid
rent in cash for March, April and May 2006. However, the couple did not
occupy the property, allegedly because they rented it on behalf of
occupants who were about to arrive in Canada. In early June 2006, Mr.
Reviczky checked the vacant property and found a hydro bill in the name of
Mr. Meleknia. Further inquiries disclosed that the property purportedly
had been sold to Mr. Meleknia on May 15, 2006.

[13]
A real estate broker
had listed the property for sale on the Multiple Listing Service on April
19, 2006. Mr. Meleknia, assisted by his mother who was a real estate
agent and by his father who was looking to invest in property, entered
into an Agreement of Purchase and Sale for the property dated April 21,
2006. The Purchase Price was $450,000.00 and a deposit of $20,000.00 was
paid. The Agreement of Purchase and Sale stated that the seller was Paul
Reviczky. Beneath the vendor's purported signature on the Agreement of
Purchase and Sale was the notation "Power of Attorney for Paul Reviczky".

[14]
The solicitor, who
acted for all of Mr. Meleknia, his parents and the bank, has filed an
affidavit. He had acted for Mr. Meleknia's father for some time, and the
father instructed him that the property was to be registered in Mr.
Meleknia's name. The father also told the solicitor that a charge was
being arranged with the bank and that the charge was to be in Mr.
Meleknia's name, with the father and mother guaranteeing the charge.

[15]
The solicitor received
a copy of the Agreement of Purchase and Sale from the real estate agent on
or about April 25, 2006. I find that the solicitor knew from it that the
person purporting to sell the property was acting pursuant to a Power or
Attorney. As mentioned, this was stated clearly on the face of the
Agreement of Purchase and Sale. The solicitor was aware of this because,
on May 3, 2006, he sent various documents to Mr. Caplan for the vendor's
signature. Beneath the signature line on each document, the solicitor had
placed the phrase "Paul Reviczky by his lawful attorney, Aaron Reviczky ".

[16]
The solicitor's
affidavit does not contain a copy of his letter of requisition. Mr.
Caplan provided a copy of it to Mr. Reviczky and an incomplete copy of it
is in Mr. Reviczky's affidavit. At the hearing, counsel provided me with
what they agreed was a complete copy of the solicitor's letter of
requisition. While it is dated May 1, 2006, it was faxed to Mr. Caplan on
May 3, 2006. The Agreement of Purchase and Sale is referred to three
times therein, further confirming the solicitor's knowledge of its
contents. The requisition did not require either that a true copy of the
Power of Attorney be produced, or that evidence be provided about the
applicability of the Power of Attorney to the property in issue, or about
its validity.

[17]
The solicitor states
in his affidavit that he searched the title to the property on May 3,
2006, and I infer that he did so before faxing his letter of requisition.
The affidavit is explicit that the solicitor "searched title". I infer
and find that he did not search the general register in respect of the
Power of Attorney.

[18]
Consequently, despite
knowing that the person purporting to sell the property was acting
pursuant to a Power of Attorney, the solicitor knew nothing about its
form, content or validity and did not take any steps to learn about these
issues.

[19]
A representative of
the bank has delivered an affidavit. I find from it that, in early May,
the bank received a charge application from Mr. Meleknia and his parents.
The bank also received a copy of the Agreement of Purchase and Sale. I
infer that the bank received it with the charge application, in early
May. I find that the bank reviewed the contents of the Agreement of
Purchase and Sale in order to determine whether to loan the monies in
issue and in order to instruct its appraiser. Consequently, I find that,
from early May onwards, the bank was aware of what the Agreement of
Purchase and Sale stated: the person purporting to sell the property was
acting pursuant to a Power of Attorney.

[20]
On or about May 4,
2006, the bank agreed to fund a new first mortgage in the sum of
$300,000.00. I infer and find that it was on or shortly after May 4, 2006
that the bank retained the solicitor to act on its behalf. At the time of
this retainer, both the bank and its solicitor knew that the person
purporting to sell the property was acting pursuant to a Power of
Attorney. At the time of this retainer, as mentioned, the solicitor had
no knowledge about any of the terms, conditions or validity of the said
Power of Attorney, and he made no inquiries in that regard. After being
retained by the bank, the solicitor also made no inquiries about the Power
of Attorney, its terms, conditions or validity.

[21]
Under date of May 11,
2006, the bank forwarded to the solicitor its standard form Mortgage Loan
Agreement. The contents of the bank's Loan Agreement establish that,
prior to advancing any funds, the bank was well aware of a variety of
risks in being a mortgage lender. The relevant provisions are as follows.
Section A of the Mortgage Loan Agreement stated that the agreement takes
precedence over the mortgage, in the event of any inconsistency between
the two. Section K of the Mortgage Loan Agreement contained "General
Terms and Conditions". Under the subheading "Conditions of Mortgage Loan
and Advance", the bank's standard form stated:

Before we
will advance any portion of the principal amount of your mortgage loan, we
require you to satisfy our applicable mortgage lending guidelines which
include our receipt of such documents and assurances in form and substance
satisfactory to us, our solicitor/notary relating to among other things:

verification
of ownership of the mortgaged property (including the contract of
purchase and sale, an appraisal, survey and documentation with respect to
encumbrances on the mortgaged property);

Under the subheading "Cancellation", the bank's
standard form stated:

We may
terminate our obligations under this Agreement and refuse to loan you
money if:

we determine that any information you have provided to us is
incorrect in any material way;

you have failed to meet any of the conditions to mortgage loan
advance described above.

[22]
I find from the bank's
standard form agreement that it knew, at all relevant times, of the risk
of the purported vendor not being the true owner of the property. That is
one of the reasons why it contracted for the rights and protections
contained in the agreement, including the right to receive documents and
assurances satisfactory to it about the "ownership" of the mortgaged
property.

[23]
With that awareness of
the risk of the purported vendor not being the true owner of the property,
and with the knowledge that the person purporting to sell the property to
Mr. Meleknia was acting pursuant to a Power of Attorney, I find that the
bank knew, from early May, that the form, content and validity of the
Power of Attorney required scrutiny. However, I find that the bank,
whether through its employees or its agents including the solicitor,
failed to scrutinize these factors. The bank's affidavit establishes that
it simply followed its "usual procedure" in reviewing and dealing with the
application for a loan, and that the transaction was completed "in the
normal course".

[24]
The transaction was
scheduled to close on May 15, 2006. On that day at 3:47 p.m., Mr. Caplan
electronically registered an instrument in the general register in respect
of the Power of Attorney. The instrument described the donor of the Power
of Attorney as Paul Reviczky, the donee as Aaron Reveczky, and stated the
following in respect of the powers given by the donor to the donee:

"I appoint
the donee as my attorney to act for and on my behalf to do all things
which I am legally entitled to do".

At 3:52 p.m., Mr. Caplan faxed a copy of this
Instrument to the solicitor.

[25]
In para. 15 of his
affidavit, the solicitor describes the steps which he took on the day of
closing as follows:

para.
15 "Immediately before completing the purchase transaction and the
registration of the HSBC mortgage, I conducted a subsearch of title to
determine whether the state of title to the Property had changed. It had
not and Paul Reveczky [sic] continued to be the sole owner"
(parenthesis added).

para. 16 "On
the day of closing and shortly before registration of the transfer and
HSBC mortgage, Mr. Caplan sent back to me by facsimile transmission a copy
of my earlier correspondence to him dated May 3, 2006, with the
handwritten notation "transfer released POA last Instrument Reg.
#AT1137886". Enclosed with the correspondence was a copy of the
registration of a power of attorney, Instrument No. AT1137886 .

On the basis
of Mr. Caplan's advice and relying upon the state of title as disclosed in
the parcel register, I proceeded to register the transfer and, thereafter,
the HSBC mortgage."

[26]
In his affidavit, the
solicitor describes his various steps in the transaction in chronological
order. I therefore find as follows. On the day of closing, the solicitor
conducted a subsearch of "title" for the purpose of determining whether
"the state of title" to the property had changed. I infer therefore that
he did not search the general register in respect of the Power of
Attorney. Consequently, up to that point in time, the solicitor still had
no knowledge of the terms, conditions or validity of the Power of Attorney
pursuant to which the property purportedly would be transferred. Then,
shortly before the solicitor registered the transfer and the charge, he
received from Mr. Caplan a copy of the instrument which he had registered
in the general register in respect of the Power of Attorney. The
solicitor does not state in his affidavit that he reviewed or relied on
this instrument, or on its registration. I therefore find that he
probably did neither. On the other hand, if he did review it, all he
would have known at the time he registered the transfer and charge was
that Paul Reviczky, the registered owner of the property, had given a
general power of attorney to Aaron Reviczky to act on his behalf, and to
do all things which Paul Reviczky was legally entitled to do. He would
have had no knowledge about the validity of the Power or Attorney itself,
as distinct from any deemed validity arising from registration of the
instrument, pursuant to the Land Titles Act and the Land
Registration Reform Act
R.S.O. 1990, c. L-4. As mentioned subsequently, the issue is whether
the bank had an opportunity to avoid the fraud. The issue in this case is
not the effect of the instrument for conveyancing purposes.

[27]
In his affidavit, the
solicitor also does not state that he knew of, and relied on what was
stated in the transfer which he registered electronically. In the box on
the transfer entitled "Transferor", is the following unsworn and unsigned
statement:

I, REVICZKY,
Aaron say that to the best of my knowledge and belief, the power of
attorney is still in full force and effect and the principal had the
capacity to give the power of attorney when giving it and was at least
eighteen years of age when the power of attorney was executed. The power
of attorney was registered as No. AT1137886 registered on 2006/06/15.

[28]
The solicitor
registered the transfer as Instrument No. AT1138040 and the charge as
Instrument No. AT1138041. Both documents were registered at 4:21 p.m. on
May 15, 2006.

[29]
Registration of the
transfer containing the unsworn and unsigned statement of the fraudster
about the validity of the Power of Attorney does not change the fact that,
before that, in proceeding with and in closing the transaction on behalf
of both his clients, the solicitor had no knowledge about the validity of
the Power or Attorney.

[30]
Mr. Caplan obtained
and kept a copy of the Power of Attorney and provided it to Mr. Reviczky's
counsel. It is a "General Power of Attorney" dated April 18, 2006. It
describes the donor as Paul Reviczky, born September 29, 1917 and the
donee as Aaron Paul Reviczky born February 22, 1978. The document states
that the donor gives the donee power and authority "to manage and conduct
all of my affairs and to exercise all of my legal rights and powers ",
including the power to:

enter into
binding contracts on the donor's behalf.

sell, convey
or perform any other act with respect to the donor's property, including
real estate.

[31]
The concluding
paragraph in the Power of Attorney describes the only relevant limitations
on the powers therein:

This Power of
Attorney shall become effective immediately, and shall not be affected by
my disability or lack of mental competence, except as may be provided
otherwise by an applicable state statute. This is a Durable Power of
Attorney. This Power of Attorney shall continue effective until my
death. This Power of Attorney may be revoked by me at any time by
providing written notice to my Agent.

[32]
Immediately below this
paragraph are the date and the purported signature of Paul Reviczky.
Below that is the following:

Witness Signature: "illegible signature"

Name: Dorsi Welsh

City: Toronto

Province: Ontario

The foregoing
Instrument was acknowledged before me this 18th day of April,
2006 by REVICZKY PAUL, who is personally known to me and who has
produced driver's license No. R2928-61901-70929 as identification.

"illegible
signature"

Sheldon N. Caplan
"NOTARIAL SEAL"

Barrister,
Solicitor, Notary Public

150 Toro Road

Downsview,
Ontario

Canada, N3J 2A9

[33]
A review of the Power
of Attorney would have disclosed the following:

a.The
purported donor, at the age of 88 years, 7 months, gave a Power of
Attorney valid until his death;

b.The
Power of Attorney could be revoked at any time;

c.The
Power of Attorney states that it shall not be affected by the donor's
disability or lack of mental competence. The Power of Attorney thus
purports to be a continuing Power of Attorney, and

d.Mr.
Caplan's decision to affix his notarial seal, signature and stamp at the
bottom of the page, as described above, would have led to the question of
whether he was a witness to the purported signature of Paul Reviczky.

[34]
Reading the witness
information contained in the Power of Attorney would have answered the
question of whether Mr. Caplan was a witness to Mr. Reviczky's purported
signature. The Power of Attorney refers to only one witness. That is
because there is, beside the heading "witness signature", only one
signature and below that, only one name. That is also because the
attestation immediately below this information refers to only person: it
states that the instrument "was acknowledged before me ".

[35]
Alternatively, the
question about whether Mr. Caplan had witnessed Paul Reviczky's signature
on the Power of Attorney could have been answered by asking Mr. Caplan
that question. The affidavits of persons other than Mr. Caplan contain
his unsworn, written assertions, made after discovery of the fraud, that
he did not witness the donor's signature, he made a notarial copy of the
Power of Attorney for his file. I find that, after discovery of the
fraud, Mr. Caplan stated this. From this, I infer and find that, if Mr.
Caplan had been asked before the closing whether he was a witness to the
donor's signature on the Power of Attorney, he would have said that he was
not.

[36]
Consequently, I find
that if the Power of Attorney had been reviewed by or on behalf of the
bank prior to closing, the bank would have known that the donor thereof,
at 88 years 7 months of age, gave a Power of Attorney valid until his
death, which could be revoked at any time and which was to continue in
effect despite the donor's lack of mental competence, but which had been
witnessed by only one witness.

[37]
Review of the Power of
Attorney prior to closing therefore would have led to several questions
about its validity. If the fraudster were questioned about the validity
of the Power of Attorney through his solicitor, he likely would have
abandoned the fraudulent scheme, to avoid apprehension and prosecution.
Alternatively, if Mr. Reviczky were questioned to determine whether he was
alive just prior to closing, whether he had revoked the Power or Attorney
or whether he was mentally competent at relevant times, its invalidity
would have been revealed. In either case, the bank would have avoided the
fraud.

THE LAW

[38]
In Lawrence
[supra], the facts were as follows. Ms. Lawrence was the true owner of
residential property. An imposter posing as her retained a lawyer to sell
her home pursuant to a forged Agreement of Purchase and Sale. Pursuant to
that agreement, the property was to be sold to another imposter, Wright.
Wright applied to Maple Trust Co. for the alleged purpose of funding the
purchase. Maple Trust Co. advanced monies, not knowing of the fraud.
Immediately after a transfer was registered to Wright, a charge in favour
of Maple Trust Co. was registered. Ms. Lawrence abandoned the allegation
that Maple Trust Co. had failed to act with due diligence. The issue was
whether that charge was valid as against the true owner. The Court of
Appeal held that it was not.

[39]
In para. [66] of
Lawrence, the court held that the Land Titles Act gives
statutory effect to the theory of deferred indefeasibility.

[40]
The court came to this
conclusion for several reasons, as follows. In Dominion Stores Ltd.v. United Trust Co.,
1976 CanLII 33 (S.C.C.), [1977] 2 S.C.R. 915, the Supreme Court
interpreted various provisions of the Land Titles Act. Gillese J.A.
stated at para. [54] of Lawrence that the majority of the Supreme
Court appeared to subscribe to the theory of deferred indefeasibility. In
what is described as the most important reason for this conclusion,
Gillese J.A. held that deferred indefeasibility is preferable, for policy
reasons, to the alternative theory of immediate indefeasibility, which
would give an innocent homeowner no defence to the claim of a mortgagee
for possession. The latter outcome would be contrary to the notion that
real property, in such circumstances, is not fungible. In addition,
Gillese J.A. stated that the theory of deferred indefeasibility is
consistent with key provisions of the Land Titles Act, namely
sections 68(1), 78 and 155. Lastly, Gillese J.A. commented that, while
the homeowner had no opportunity to avoid the fraud, the mortgagee did
have that opportunity. Gillese J.A. therefore held at para. [58]:

"By
interpreting the Act in accordance with the theory of deferred
indefeasibility, the law encourages lenders to be vigilant when making
mortgages and places the burden of the fraud on the party that has the
opportunity to avoid it, rather than the innocent homeowner who played no
role in the perpetration of the fraud".

[41]
In para. [2] of these
reasons, I quoted from para. [67] of the reasons in Lawrence.
There, Gillese J.A. described an intermediate owner as a party "acquiring
an interest in land from the party responsible for the fraud", and a
deferred owner as "any subsequent purchaser or encumbrancer". These
transactional proximities are the traditional basis for analysis and
determination of the rights of the party acquiring a disputed interest in
the land. In the case at bar, the bank urges this analysis on the court.

[42]
However, I read the
reasons in Lawrence as refining and changing the traditional
analysis. In Lawrence, the chargee, Maple Trust Co., acquired its
interest in the land from the fraudster. Gillese J.A. therefore could
have relied on the traditional basis for holding that the chargee's
interest was defeasible in favour of the true owner. That was not the
ratio of the decision. Gillese J.A. looked deeper into the transactional
dynamics, isolating a factor inherent in Maple Trust Co. having acquired
its interest from the fraudster which, I believe, was determinative. The
factor which determined that Maple Trust Co.'s interest was defeasible was
that it had an opportunity to avoid the fraud. As Gillese J.A. stated in
para. [67], parties acquiring an interest in land from the fraudster
(called intermediate owners) are vulnerable to the true owner's claim
"because" they had an opportunity to avoid the fraud. Gillese J.A. did
not hold that Maple Trust Co.'s interest was defeasible because it
acquired its interest from the fraudster. Consequently, within the
broader notion of transactional proximities to the fraudster is the more
specific, determinative factor, the opportunity to avoid the fraud.

[43]
Gillese J.A. then went
further, emphasizing this refined analysis by exploring its application to
deferred owners, even though there was no deferred owner in Lawrence.
Subsequent owners and encumbrancers, called deferred owners, have no
opportunity to avoid the fraud. "Therefore", Gillese J.A. explained in
para. [67], " the deferred owner acquires an interest in the property that
is good as against all the world." The deferred owner therefore acquires
an indefeasible interest as against the true owner because of having had
no opportunity to avoid the fraud. That lack of opportunity is the
determinative factor within the lesser transactional proximity to the
fraudster which is implicit in being a subsequent purchaser or
encumbrancer.

[44]
My conclusion that
Lawrence refined and changed the analysis is also based on what
Gillese J.A. said in para. [58]: the burden of the fraud is placed on the
party that had the opportunity to avoid the fraud by interpreting the
Land Titles Act in accordance with the theory of deferred
indefeasibility. To my mind, that indicates that the opportunity to avoid
the fraud is now central to the theory of deferred indefeasibility as a
rationale for allocating loss amongst competing parties who claim an
interest in land under the Land Titles Act.

[45]
Consequently, the
analysis continues to be based on transactional proximities but with the
relevant transactional attributes refined or redefined. The relevant
transactional attributes now do not consist solely of formal transfers and
charges, from whom they were obtained, and the sequence in which they were
registered. The relevant transactional attributes now include the
determinative one: whether a party to a transaction had the opportunity
to avoid the fraud in issue. If this appears to be inconsistent with the
Land Titles Act, it should be remembered that, in Dominion
Stores [supra], the majority of the Supreme Court held that the
common law continues to be part of the law of Ontario in respect of land
under the Land Titles Act except where it is expressly abrogated.
This is not a pure Torrens system.

[46]
In Lawrence, there was
no deferred owner, as Gillese J.A. noted at para. [22]. It is therefore
necessary to consider whether Lawrence's determination of the
aforementioned defining characteristic of deferred owners is obiterdicta. I do not think it is, because an integral part of the
court's ratio decidendi was that the Land Titles Act gives
statutory effect to the theory of deferred indefeasibility. While the
facts in Lawrence fell within one part of that theory, nonetheless
the theory itself and its alternative consequences were essential aspects
of the ratio. If I had decided that I am not bound by this determination,
I would have chosen to follow it. Consistency is important in this
evolving area of the law.

[47]
The Home Trust Co.
case [supra] was decided before Lawrence. The facts were as
follows. Ms. Zivic was the true owner of the property. She rented the
property to S. S purported to sell the property to B without Ms. Zivic's
knowledge. B, also a fraudster, applied for purchase financing from two
chargees. The chargees and B used the same solicitor. The purported
transaction closed and a transfer was registered, followed shortly by the
charges. B disappeared with the borrowed funds. The chargees sought a
declaration that they had valid charges on Ms. Zivic's property.

[48]
Pepall J. concluded at
para. [25] that the transfer to the fraudster B and the two charges were,
for all intents and purposes, registered simultaneously. Consequently,
these registrations should be treated as one transaction. The doctrine of
deferred indefeasibility therefore was inapplicable.

[49]
In addition, Pepall J.
noted that the chargees retained the same solicitor as B and as a result,
there was no independent due diligence conducted on their behalf. Pepall
J. therefore held at para. [25]:

"It seems to
me that the mortgagees, although innocent, should bear the burden of the
fraud over the legitimate registered owner who had no role in the
perpetration of fraud. Such a determination is consistent with
maintaining the integrity of the Land Titles system but it also
places a greater burden on mortgagees who had an opportunity to be more
vigilant with respect to the transaction they entered into".

[50]
The chargees
application for a declaration of validity was dismissed.

[51]
Pepall J.'s dismissal
of the application appears to rest on two dominant reasons:

a.The transfer and charge registrations comprised one
transaction; and

b.The chargees had the opportunity to "be more vigilant" and
should bear the burden of the fraud instead of the true owner, who
had "no role in the perpetration of the fraud".

[52]
The conclusion that
the theory of deferred indefeasibility was not applicable flowed from the
conclusion that purchase money charges and a transfer to the purchaser
should be regarded as a single transaction. With the benefit of the
analysis in Lawrence, I think it is correct that the theory of
deferred indefeasibility would now be taken into account in considering
these issues. Regardless, in coming to a conclusion, Pepall J. relied on
the criterion which the Court of Appeal later approved in Lawrence
[supra], namely, the chargees' opportunity to avoid the fraud.

[53]
Consequently, applying
the Lawrence analysis and the theory of deferred indefeasibility to
the facts in Home Trust Co., the chargees had the opportunity to
avoid the fraud and therefore, they are intermediate owners whose
interests are defeasible in favour of the true owner.

[54]
The ratio in
Lawrence [supra] did not specifically address Pepall J.'s
conclusion that the transfer and charges were to be treated as registered
simultaneously and as comprising one transaction. Lawrence [supra]
was a case of a purchase money charge and the Court of Appeal did not
treat the transfer and charge as one transaction.

[55]
A purchase money
chargee may or may not have an opportunity to avoid the fraud. In Home
Trust Co., both the purchaser-chargor and the chargees were
represented by the same solicitor, as in the case at bar. Pepall J. took
that into account in concluding that the chargees had the opportunity to
be more vigilant in respect of the fraud. Pursuant to the Lawrence
analysis, the chargees had the opportunity to avoid the fraud.

The Land Titles Act

[56]
The relevant
provisions of the Act are as follows:

Section 68(1) No person, other than the registered owner, is
entitled to transfer or charge registered freehold or leasehold land
by a registered disposition.

Section 70(1) A person may, under a power of attorney,
authorize another person to act for that person in respect of any land or
interest therein under this Act.

Section 70(2) A power of attorney or a notarial or certified
copy of it may be registered in the prescribed manner.

Section 78(4) When registered, an instrument shall be deemed
to be embodied in the register and to be effective according to its nature
and intent, and to create, transfer, charge or discharge, as the case
requires, the land or estate or interest therein mentioned in the
register.

Section 93(1) A registered owner may in the prescribed
manner charge the land with the payment at an appointed time of any
principal sum of money either with or without interest or as security for
any other purpose and with or without a power of sale.

Section 93(3) The charge, when registered, confers upon the
chargee a charge upon the interest of the chargor as appearing in the
register subject to the encumbrances and qualifications to which the
chargor's interest is subject, but free from any unregistered interest in
the land.

Section 155 Subject to this Act, a fraudulent
instrument that, if unregistered, would be fraudulent and void is, despite
registration, fraudulent and void in like manner.

The various amendments to the Act which
came into effect on October 19, 2006 do not apply to the facts herein.

[57]
The Land Titles Act
specifically addresses Powers of Attorney. In s. 70(1), the Act
recognizes the effectiveness of a Power of Attorney for its purposes.
Section 70(2) provides for registration of the Power of Attorney itself,
or of a notarial or certified copy of it, as an alternative to an
instrument which describes aspects of the Power or Attorney. This
subsection is permissive, not mandatory. Nonetheless, the Legislature has
recognized that the terms and conditions of a Power of Attorney may not be
amenable to summary or to a short hand description in an instrument to be
registered, and also that issues in respect of validity of the Power or
Attorney as executed may be masked by a registered instrument.

[58]
Section 78 is the
successor to section 85 of the Land Titles Act R.S.O. 1970, c. 234,
which was considered by the Supreme Court in Dominion Stores Limited v.
United Trust Co. [supra]. The majority held that section 85
did not abrogate or displace the common law as it relates to land law in
Ontario. As Lawrence [supra] holds, that is why the theory
of deferred indefeasibility applies to the Land Titles Act, and the
theory is why section 78(4) did not result in Maple Trust Co.'s
registered charge being, in the words of section 78(4), "effective
according to its nature and intent", and creating a charge.

[59]
Section 93 applies
specifically to charges. Section 93(1) parallels section 68(1). Section
93(3) parallels section 78(4) in legislating that registration of a charge
confers a charge on the chargor's interest. In my opinion, the reasoning
in the Dominion Stores case [supra] also applies to section
93(3) and, as was held in Lawrence in relation to section 78(4),
the theory of deferred indefeasibility applies to section 93(3) and may
prevent it from having its stated effect.

[60]
Gillese J.A. addressed
section 155 in para. [33] of Lawrence and held that, leaving aside
the introductory clause, this section provides that a charge which, if
unregistered, would be fraudulent and void remains fraudulent and void
despite registration. In considering the introductory clause and its
meaning, Gillese J.A. considered in particular section 78(4) and, at paras.
[55] and [56] of Lawrence, held that these sections are consistent
with the theory of deferred indefeasibility. In the result, the effect of
sections 78(4) and 93(3) on a party acquiring an interest in land from the
fraudster, or subsequent to that, depends on whether that party had an
opportunity to avoid the fraud.

Section 22If a
document is registered in an electronic format and the document exists in
a written form that is not a printed copy of the electronic document, the
electronic document or a printed copy of the electronic document prevails
over the written form of the document in the event of a conflict.

[62]
This section was not
addressed in argument. It applies to the instrument which Mr. Caplan
registered in respect of the Power of Attorney, a copy of which he
forwarded to the solicitor just prior to the closing. In the case at bar,
the solicitor does not state that he reviewed or relied on the copy of the
electronic document, or relied on its registration. I have concluded that
he probably did neither. While the Act says that the electronic
document prevails over the written Power of Attorney "in the event of a
conflict", there was no conflict from the solicitor's perspective. Even
if he did read and rely on the instrument, he took no steps to inform
himself about the terms, conditions or validity of the Power of Attorney.
In any event, the issue is not the effect of the instrument for
conveyancing purposes. The issue is whether the bank had an opportunity
to avoid the fraud.

Section 7(1) A power of attorney for
property is a continuing power of attorney if,

(a)it states that it is a continuing power of attorney; or

(b)it expresses the
intention that the authority given may be exercised during the grantor's
incapacity to manage property.

Section 10(1) A continuing power of attorney shall be executed
in the presence of two witnesses, each of whom shall sign the power of
attorney as witness.

Section 10(2) The following persons shall not be witnesses:

1.The attorney or the attorney's spouse or
partner.

2.The grantor's spouse or partner.

3.A child of the grantor or a person whom the
grantor has demonstrated a settled intention to treat as his or her child.

4.A person whose property is under guardianship
or who has a guardian of the person.

5.A person who is less than eighteen years old.

Section 10(4) A continuing power or attorney that does not
comply with subsections (1) and (2) is not effective

[64]
It is helpful to
recall that the Power of Attorney in issue was a forged document which was
being used to perpetrate a fraud. The relevance of this Act is not
the ineffectiveness of this forged document. The relevance is the role
which the aforesaid sections, particularly section 10, have in determining
whether the bank had an opportunity to avoid the fraud. As I have said,
if the Power of Attorney had been scrutinized, several questions in
respect of its validity would have been apparent, and pursuing those
questions, with either the purported donee or with the purported donor,
likely would have prevented the fraud. The Power of Attorney purported to
be a continuing power of attorney under section 7(1) but it was witnessed
by only one witness, contrary to the mandatory requirements of section
10(1). I do not need to consider whether, under section 10(4),
non-compliance with section 10(1) alone means that the power of attorney
is invalid. That is because validity of this forged document is not the
issue. The issue is that, if the Power of Attorney had been scrutinized
on behalf of the bank, the contravention of section 10(1) and the question
of possible invalidity under section 10(4) would have been reasons for
making the inquiries which, if made, probably would have prevented the
fraud.

CONCLUSION

[65]
The ratio in
Lawrence [supra], distilled to the essence, may be described as
follows:

i.
Evidence that a party dealt with a fraudster establishes that the party
had an opportunity to avoid the fraud; and

ii.
Having an opportunity to avoid the fraud makes the party's interest in
land defeasible in favour of the true owner.

[66]
In the case at bar,
these factors are established. The bank, although technically a
subsequent encumbrancer, dealt with the fraudster because the bank through
its agent, the solicitor, dealt with the fraudster through his agent, his
solicitor. That is sufficient to hold that the bank's charge is
defeasible in favour of the true owner.

[67]
In addition, the
evidence shows that the bank could have avoided this fraud. Powers of
Attorney are important legal mechanisms. Powers of Attorney are not
standard and invariable in their form. They are infinitely variable in
the powers granted and in their duration. They may be revocable or
irrevocable, voidable, void, real or forged, or terminated by the death of
the grantor. Like any legal mechanisms, a Power of Attorney may be
misused. A forged Power of Attorney is an easy means of stealing a
person's identity. Forged Powers of Attorney therefore are an easy means
of perpetrating mortgage fraud.

[68]
The bank knew, at all
relevant times, that the person purporting to sell the property was acting
pursuant to a Power of Attorney. The bank had the means of protecting its
interests in this circumstance, whether through the chargor's obligations
to it pursuant to its standard Mortgage Loan Agreement or through the
solicitor. The bank chose to retain the purchaser/chargor's solicitor to
act on its behalf, and I infer that the bank must have known that the
solicitor would be in direct dealings with the person purporting to sell,
whether through that person's solicitor or otherwise. Having been
retained by the bank, it was the solicitor's responsibility to protect the
bank's interests. However, the solicitor did nothing to scrutinize the
Power of Attorney. As I have held, scrutiny of it would have led to
questions which likely would have avoided the fraud. However, none of
this was done because of a "business as usual" approach to a transaction
which required something more. It required, for example, the level of
care and analysis which the bank empowered itself to perform by its
standard Mortgage Loan Agreement.

[69]
I have refrained from
commenting on Mr. Caplan's actions in registering the instrument in
respect of the Power of Attorney, and also from addressing section 27 of
the Electronic Registration Regulation, O.Reg. 19/99, pursuant to
the Land Registration Reform Act [supra] which states:

In addition to the matters set out in
sections 4 and 8, a power of attorney submitted for electronic
registration shall contain,

(a) the name of the person or the title of
the office holder appointed under the power;

(b) a statement that the attorney is
entitled to make statements of spousal status under the Family Law Act
on behalf of the donor; and

(c) a statement that the giving of the
power has been witnessed in accordance with the Substitute Decisions
Act, 1992, if the power is given under that Act.

The issue is whether the bank had an opportunity to
avoid the fraud. This issue is not Mr. Caplan's actions or inaction in
relation to section 27(c) of this Regulation.

Order

[70]
A declaration will
issue that the bank's charge is not a valid charge on Mr. Reviczky's
property.

[71]
An order will also
issue that the Land Registrar delete the bank's charge from the parcel
register for Mr. Reviczky's property.

[72]
I award Mr. Reviczky
his costs against the bank on a partial indemnity basis. I award no costs
to the intervener, Mr. Caplan. My endorsement on the Application Record
contains some additional terms of the costs order.

Concluding Thoughts

[73]
Casting the test in
terms of opportunity to avoid the fraud may appear to move it closer to a
fault test. However, in Lawrence, allegations that the chargee,
Maple Trust Co. failed to exercise due diligence were abandoned: see para.
[4] of Lawrence. The Court of Appeal held that Maple Trust Co. had
an opportunity to avoid the fraud even though there was no lack of due
diligence on its part. Legal fault concepts were not part of the ratio in
Lawrence. Yet, one of the principles on which the decision was
based was encouraging lenders to be vigilant when making mortgages: see
para. [58] of Lawrence.

[74]
Premising
defeasibility on an opportunity to avoid the fraud and determining
opportunity solely on the basis of transactional proximity to the
fraudster, without fault concepts including causation playing a role, is,
I think, likely to result in difficulties. If lenders increase their
vigilance in mortgage transactions, that will increase the likelihood that
they will be in proximity to unidentified fraudsters. If the fraud is not
discovered and a loan is made on the security of a mortgage, the risk of
defeasibility is increased by that increased vigilance, if fault concepts
including causation are not part of the test. On the other hand, being
less vigilant and avoiding inquiries also avoids some of the risk of being
in proximity to unidentified fraudsters. If a loan is made on the
security of a mortgage, there will be an increased likelihood that the
mortgage will be indefeasible.

[75]
In Rabi v. Rosu
(2006), 277 D.L.R. (4th) 544 (Ont. S.C.J.), Echlin J. touched
on this issue when, at para. [41], he described deferred indefeasiblity as
placing "the risk of fraud on the party who, by due diligence, has an
opportunity to uncover and possibly prevent it". This decision was before
the Lawrence decision. It was mentioned in Lawrence but
Echlin J's due diligence analysis was not adopted.

[76]
I am bound to follow
the ratio in Lawrence. I am also respectfully of the opinion that
the question of what constitutes an opportunity to avoid the fraud may
need to be revisited, at some time in the future.

[77]
These concerns do not
arise in the case at bar. The bank had the opportunity to avoid the fraud
on either view. It dealt with the fraudster and, whether through its
solicitor or otherwise, it did not take steps to scrutinize the Power of
Attorney. The bank chose to put itself in proximity to the unknown
fraudster in this transaction by dealing with him, yet it failed to make
use of the opportunity to avoid the fraud which that proximity gave it.